An intuitively appealing decision rule is to allocate a company's scarce marketing resources to where they have the greatest long-term benefit. This principle, however, is easier to accept than it ...

/pdf/sustained-spending-and-persistent-response-a-new-look-at-44lg8afpjm.pdf

Sustained Spending and Persistent Response: A New Look at Long-Term Marketing Profitability:

Using a unique micro data set, we find pervasive evidence of price asymmetry that is systematically related to inflation. An ordered probit model of pricing by manufacturing, building and merchandising firms shows that inflation: (i) increases the probability of a price increase in response to cost increases and (ii) decreases the probability of a price decrease in response to decreases in demand. Predicted inflation-induced asymmetries also show up for price responses to cost decreases and demand increases but not as overwhelmingly. Similar asymmetries are evident in firm's expectations of price changes, with a slight optimistic bias relative to actual changes.

/pdf/inflation-and-asymmetric-price-adjustment-691og1tp4b.pdf

Inflation and Asymmetric Price Adjustment

I INTRODUCTION Recent empirical research has rejuvenated interest in the idea that output responds asymmetrically to monetary shocks Cover [1988] found that in the USA during the post-WWII period positive shocks to the money supply had no effect on output, whereas negative shocks reduced output His results have been corroborated by De Long and Summers [1988] and Morgan [1993] using different time periods and measures of monetary shocks Results from Karras [1996a,b] suggest output asymmetry may be an international phenomenon The reasons for output asymmetry remain unclear They may be due to asymmetries anywhere in the transmission of monetary shocks to output Asymmetric price adjustment by firms is one possible explanation, but to date the evidence concerning price asymmetry has been mixed Using data from 38 countries, Karras [1996b] finds no evidence of price asymmetry in response to money supply shocks, whereas studies of the effect on inflation of aggregate output gaps by Laxton, Meredith and Rose [1995] and Turner [1995] imply that money supply shocks are more inflationary as an economy approaches full capacity and less inflationary when an economy approaches low capacity The aim of this paper is to test whether output responds asymmetrically to shocks and to evaluate the role of firm pricing behavior Our approach is different from previous studies in several respects We use micro-level firm data, we evaluate both output and price asymmetry for a common sample of firms, and we evaluate the influence of inflation The only previous empirical work examining the influence of inflation on output asymmetry is Rhee and Rich [1995] who find that the asymmetric relationship between monetary shocks and aggregate output revealed by Cover is influenced by inflation We use individual firm data, obtained by a survey of New Zealand manufacturing firms, to estimate a model of output and price change based on a theoretical model of price and output asymmetry developed by Ball and Mankiw [1994] They consider a situation in which firms make regularly scheduled price changes and, by paying a menu cost, can also make special adjustments in response to shocks to desired price The presence of menu costs of price adjustment implies a zone of no-price-change over which shocks to desired price will not result in a change in actual price Inflation affects the opportunity cost of not changing price and therefore the position of this zone of no-price-change Asymmetries in the response of prices to shocks therefore arise naturally when there is positive trend inflation and are predicted to be more pronounced at higher rates of inflation Ball and Mankiw suggest that a corollary of price asymmetry is output asymmetry At high inflation prices are predicted to be more responsive to positive shocks than to negative shocks and output more responsive to negative shocks than to positive shocks As inflation falls these asymmetries are predicted to become less pronounced We evaluate output and price asymmetry and the influence of inflation in two ways First, we estimate the zone of no-price-change and the zone of no-output-change and evaluate how inflation affects the position of these zones Second, we evaluate how the response of prices and output to positive and to negative cost and demand shocks vary with inflation Using ordered-probit analysis, we find evidence of output asymmetry and price asymmetry which are systematically related to inflation Furthermore, the relative behavior of output and prices is consistent with price asymmetry being an explanation for output asymmetry The remainder of the paper is structured as follows The second section explains why firm prices and output may respond asymmetrically to shocks and the potential role of inflation in this process The third section explains the survey data used to test for asymmetry at different rates of inflation …

Inflation and asymmetric output adjustments by firms

This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.

Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly

This paper considers respondent dynamics within the NZIER quarterly survey of business opinion. The paper concentrates mainly on the potential usefulness of matched and individual survey responses with particular reference to business confidence. The main framework is a three-by-three matrix of responses by firms who have participated in adjacent surveys. This framework provides information on the dynamics (flows) of business opinion as opposed to the usual published information on end-of-period net balances (stocks). The paper highlights the volatility of business opinion with respect to both economy-wide and own-outlook. Almost half the firms replying to adjacent surveys, for example, changed their outlook between quarters regarding business confidence, output and profitability.

Respondent dynamics within the NZIER survey of business opinion: An introductory perspective

The way in which economic agents respond to unexpected changes to demand is a central issue in contemporary business cycle theories. Although several empirical papers have used macro data to evaluate this issue there are very few results available that have used direct measures of expectation errors from micro panel data. This paper uses micro panel data from a New Zealand quarterly tendency survey to derive expectation errors for nine variables over an unusually long period of 24 years. A vector-autoregressive model is estimated and used to simulate the dynamic reaction of manufacturers to surprising changes to demand. Unexpected changes to demand are important in explaining unplanned changes in output, inventories, employment and labor turnover. Selling price and cost expectation errors are not particularly sensitive to surprising changes to demand. Copyright 1991 by Blackwell Publishing Ltd

How do firms react to surprising changes to demand?: a vector autoregressive analysis using business survey data

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How do firms react to surprising changes to demand?: a vector autoregressive analysis using business survey data